FAC3701
NOTES
,Study Unit 1 : Income taxes (IAS 12 and FRG 1)
Definitions :
a) Accounting profit: net profit or loss for a period before deducting tax expense.
b) Taxable profit/(tax loss): the profit or loss for a period upon which income tax is
payable to the SA Revenue Service.
c) Tax expense/tax income: aggregate amount disclosed in the statement of profit or
loss and other comprehensive income (P/L) as income tax expense/income. Includes
both current tax and deferred tax.
d) Current tax: amount of income taxes payable/(recoverable) in respect of the taxable
profit/(tax loss) for the year.
e) Deferred tax liabilities: taxes provided in the statement of financial position (SFP) for
the amount of income taxes payable in future periods in respect of taxable
temporary differences.
f) Deferred tax assets: amounts of income taxes recoverable in future periods in
respect of deductible temporary differences; the carry forward of unused tax losses;
and the carry forward of unused tax credits.
g) The following definitions must be applied when determining the tax base of an item:
The tax base (TB) of an asset or liability is the amount attributable to that
asset or liability for tax purposes.
The tax base of an asset is the amount that will be deductible for tax
purposes in future against any taxable economic benefits that will flow to
the entity when it recovers/settles the carrying amount of the asset.
The tax base of a liability is the carrying amount of the liability, less any
amount that will be deductible for tax purposes in respect of that liability in
future.
The tax base of the liability – revenue received in advance – is its carrying
amount less any amount of revenue that will not be taxable in future.
h) Temporary differences: differences between the tax base of an asset or liability and
the carrying amount of the asset or liability in the statement of financial position.
i) Temporary differences may be either of the following:
Taxable temporary differences:
o Rule 1: Carrying amount of the asset > tax base of the asset
= DEFERRED TAX LIABILITY (SFP)
o Rule 2: Carrying amount of the liability < tax base of the liability
= DEFERRED TAX LIABILITY (SFP)
o It will result in a taxable profit in the future.
Journal entry:
DR CR
R R
Deferred tax expense (P/L) xxx
Deferred tax liability (SFP) xxx
Provision made for deferred tax expense
Deductible temporary differences:
o Rule 3: Carrying amount of the asset < tax base of the asset
= DEFERRED TAX ASSET (SFP)
o Rule 4: Carrying amount of the liability > tax base of the liability
= DEFERRED TAX ASSET (SFP)
, o It will result in deductions in determining taxable profit of future
periods when the carrying amount of the liability is settled.
Journal entry:
DR CR
R R
Deferred tax asset (SFP) xxx
Deferred tax (P/L) xxx
Provision made for deferred tax
Schematic summary of temporary differences: Page 7 – MO001
Objectives :
IAS 12 refers to the statement of financial position approach. Deferred tax is
measured on the difference between:
The carrying amount of the entity’s assets and liabilities; and
The tax base of each of the entity’s assets and liabilities.
The income tax expense is calculated in the following manner:
R
Profit before tax (as per the P/L) xxx
Exempt differences xxx
Profit after exempt differences xxx
Temporary differences (taxable/deductible) xxx
Taxable profit/tax loss xxx
Current tax expense (28% of taxable profit) – Rnil if tax loss xxx
Deferred tax expense (28% of temporary differences) xxx
SA Normal tax* xxx
*Assuming that the tax rate is 28%
Exempt Differences :
A deferred tax liability should be recognised for all taxable temporary differences
unless the deferred tax liability arises from:
a) Goodwill for which amortisation is not deductible for tax purposes; or
b) The initial recognition of an asset or liability in a transaction which:
I. Is not a business combination (not for this module); and
II. At the time of the transaction, affects neither the accounting profit
nor the taxable profit (tax loss)
Treated as exempt differences and no deferred tax expense is provided on them.
Items that are never taxable nor tax deductible and therefore no tax is provided on
them.
Example of exempt differences are:
Exempt income, namely:
o Dividends received; and
o The portion of capital profits on the sale of assets that is not taxable
Non tax deductible expenses, namely:
o Fines; and
o Donations
Examples of taxable temporary differences and the treatment thereof according to the
statement of financial position approach :
, Capital allowances :
The depreciation calculated by the tax authorities is often referred to as a
capital allowance or tax allowance.
Accounting purposes:
o The carrying amount of a non-current asset is calculated as follows:
R
Original cost xxx
Less: accumulated depreciation (xxx)
Carrying amount xxx
o The profit or loss on sale of a non-current asset (capital and non-
capital portions) is as follows:
R
Proceeds on sale xxx
Less: carrying amount (xxx)
Profit/(loss) on sale xxx
o The non-capital profit included in the profit on sale of a non-current
asset is as follows:
R
Proceeds on sale, limited to original cost xxx
Less: carrying amount (xxx)
Non-capital profit/(loss) xxx
o Tax purposes:
The tax base is calculated as follows: R
Original cost xxx
Less: accumulated capital allowances (tax allowance) (xxx)
Tax base xxx
o The taxable recoupment (or scrapping allowance) is calculated as
follows:
R
Proceeds on sale, limited to original cost xxx
Less: tax base (xxx)
Recoupment/(scrapping allowance) xxx
Prepayments :
Are amounts actually incurred in the current year and therefore tax
deductible in terms of section 11(a) of the Income Tax Act.
For accounting purposes, the amount is not taken to the statement of profit
or loss and other comprehensive income as a deduction, but is disclosed as a
current asset in the statement of financial position.
Due to the fact that it will only be taken into account the following year, a
temporary difference occurs.
The carrying amount will be equal to the prepayment and the tax base is
Rnil.
Recognition of deferred tax assets :
NOTES
,Study Unit 1 : Income taxes (IAS 12 and FRG 1)
Definitions :
a) Accounting profit: net profit or loss for a period before deducting tax expense.
b) Taxable profit/(tax loss): the profit or loss for a period upon which income tax is
payable to the SA Revenue Service.
c) Tax expense/tax income: aggregate amount disclosed in the statement of profit or
loss and other comprehensive income (P/L) as income tax expense/income. Includes
both current tax and deferred tax.
d) Current tax: amount of income taxes payable/(recoverable) in respect of the taxable
profit/(tax loss) for the year.
e) Deferred tax liabilities: taxes provided in the statement of financial position (SFP) for
the amount of income taxes payable in future periods in respect of taxable
temporary differences.
f) Deferred tax assets: amounts of income taxes recoverable in future periods in
respect of deductible temporary differences; the carry forward of unused tax losses;
and the carry forward of unused tax credits.
g) The following definitions must be applied when determining the tax base of an item:
The tax base (TB) of an asset or liability is the amount attributable to that
asset or liability for tax purposes.
The tax base of an asset is the amount that will be deductible for tax
purposes in future against any taxable economic benefits that will flow to
the entity when it recovers/settles the carrying amount of the asset.
The tax base of a liability is the carrying amount of the liability, less any
amount that will be deductible for tax purposes in respect of that liability in
future.
The tax base of the liability – revenue received in advance – is its carrying
amount less any amount of revenue that will not be taxable in future.
h) Temporary differences: differences between the tax base of an asset or liability and
the carrying amount of the asset or liability in the statement of financial position.
i) Temporary differences may be either of the following:
Taxable temporary differences:
o Rule 1: Carrying amount of the asset > tax base of the asset
= DEFERRED TAX LIABILITY (SFP)
o Rule 2: Carrying amount of the liability < tax base of the liability
= DEFERRED TAX LIABILITY (SFP)
o It will result in a taxable profit in the future.
Journal entry:
DR CR
R R
Deferred tax expense (P/L) xxx
Deferred tax liability (SFP) xxx
Provision made for deferred tax expense
Deductible temporary differences:
o Rule 3: Carrying amount of the asset < tax base of the asset
= DEFERRED TAX ASSET (SFP)
o Rule 4: Carrying amount of the liability > tax base of the liability
= DEFERRED TAX ASSET (SFP)
, o It will result in deductions in determining taxable profit of future
periods when the carrying amount of the liability is settled.
Journal entry:
DR CR
R R
Deferred tax asset (SFP) xxx
Deferred tax (P/L) xxx
Provision made for deferred tax
Schematic summary of temporary differences: Page 7 – MO001
Objectives :
IAS 12 refers to the statement of financial position approach. Deferred tax is
measured on the difference between:
The carrying amount of the entity’s assets and liabilities; and
The tax base of each of the entity’s assets and liabilities.
The income tax expense is calculated in the following manner:
R
Profit before tax (as per the P/L) xxx
Exempt differences xxx
Profit after exempt differences xxx
Temporary differences (taxable/deductible) xxx
Taxable profit/tax loss xxx
Current tax expense (28% of taxable profit) – Rnil if tax loss xxx
Deferred tax expense (28% of temporary differences) xxx
SA Normal tax* xxx
*Assuming that the tax rate is 28%
Exempt Differences :
A deferred tax liability should be recognised for all taxable temporary differences
unless the deferred tax liability arises from:
a) Goodwill for which amortisation is not deductible for tax purposes; or
b) The initial recognition of an asset or liability in a transaction which:
I. Is not a business combination (not for this module); and
II. At the time of the transaction, affects neither the accounting profit
nor the taxable profit (tax loss)
Treated as exempt differences and no deferred tax expense is provided on them.
Items that are never taxable nor tax deductible and therefore no tax is provided on
them.
Example of exempt differences are:
Exempt income, namely:
o Dividends received; and
o The portion of capital profits on the sale of assets that is not taxable
Non tax deductible expenses, namely:
o Fines; and
o Donations
Examples of taxable temporary differences and the treatment thereof according to the
statement of financial position approach :
, Capital allowances :
The depreciation calculated by the tax authorities is often referred to as a
capital allowance or tax allowance.
Accounting purposes:
o The carrying amount of a non-current asset is calculated as follows:
R
Original cost xxx
Less: accumulated depreciation (xxx)
Carrying amount xxx
o The profit or loss on sale of a non-current asset (capital and non-
capital portions) is as follows:
R
Proceeds on sale xxx
Less: carrying amount (xxx)
Profit/(loss) on sale xxx
o The non-capital profit included in the profit on sale of a non-current
asset is as follows:
R
Proceeds on sale, limited to original cost xxx
Less: carrying amount (xxx)
Non-capital profit/(loss) xxx
o Tax purposes:
The tax base is calculated as follows: R
Original cost xxx
Less: accumulated capital allowances (tax allowance) (xxx)
Tax base xxx
o The taxable recoupment (or scrapping allowance) is calculated as
follows:
R
Proceeds on sale, limited to original cost xxx
Less: tax base (xxx)
Recoupment/(scrapping allowance) xxx
Prepayments :
Are amounts actually incurred in the current year and therefore tax
deductible in terms of section 11(a) of the Income Tax Act.
For accounting purposes, the amount is not taken to the statement of profit
or loss and other comprehensive income as a deduction, but is disclosed as a
current asset in the statement of financial position.
Due to the fact that it will only be taken into account the following year, a
temporary difference occurs.
The carrying amount will be equal to the prepayment and the tax base is
Rnil.
Recognition of deferred tax assets :
